Tax Amnesty Period Helps Users of Fulfillment Services
Updated as of August 22, 2017: The District of Columbia, Massachusetts, Minnesota, Missouri, and North Carolina have joined the Multistate Tax Commission (“MTC”) National Nexus Program since this tax alert was originally published. You can check the MTC’s Nexus Program landing page for updates as new states join the initiative.
Do you sell products to customers in a state where you don’t have your own office or warehouse? If so, do you use a third party to handle the shipment of products to your customers? If you answered yes to these questions, you may be liable for state sales, income and/or franchise taxes. And, if your business is like many others, you may not have realized you have this obligation.
While businesses don’t generally have to collect sales tax for a state where they don’t have a physical presence, there’s no “bright line” that determines how much physical presence is required to create nexus. Even if you don’t have a physical location in a given state, using a satellite or third-party warehouse could be enough to establish nexus in some jurisdictions. In other words, having inventory stored and/or shipped by a third party, such as Amazon, will create nexus for a business in a state. Many taxpayers may not even be aware that they’ve established nexus under these conditions. Once a business has nexus in a state, the state may require that business to collect and remit sales tax on any goods sold or shipped into the state and/or pay state income or franchise tax.
As discussed in a previous alert, “Sales and Use Tax, Technology and the Evolving Definition of Sales Tax Nexus,” the changing economy has caused states to become much more aggressive about enacting laws that redefine nexus for sales tax purposes in their jurisdictions. They are being even more aggressive in pursuing taxpayers who don’t comply with the rules. However, a new amnesty program may relieve you of exposure for prior tax periods.
This new tax amnesty program was recently announced by the Multistate Tax Commission (“MTC”). The MTC’s Multistate Voluntary Disclosure Program (“MVDP”) applies to businesses that use fulfillment services, such as those provided by Amazon.com, eBay.com, Walmart.com and similar online marketplace providers. These service providers allow businesses to ship products to warehouses and fulfillment centers operated by the online retailer. The inventory is then listed online, sold, and shipped by the marketplace provider on behalf of the seller. While this service provides a quick method for small businesses and others to tap into the advanced e-commerce and logistics capabilities of the nation’s largest online retailers, many of these small online sellers are unaware of the sales and income tax ramifications of storing inventory at these third-party warehouses that are often located outside their home state. Businesses that use fulfillment services can generally participate in the MVDP if they have not had previous contact with the state tax authority for the tax in question and if they do not have property or employees in the state, excluding any activities related to the third-party seller.
Most state voluntary disclosure programs (“VDPs”) require a business to report and pay at least three years of prior period tax liabilities. However, many states are completely forgiving prior tax liabilities for taxpayers who qualify and register for this MVDP. Under this program, taxpayers would be able to register with a state to file and pay the relevant tax going forward, escaping liability for all prior periods. This arrangement represents a significant savings over the normal VDPs offered by the participating states. Participation by taxpayers can result in substantial savings. No forgiveness is available for sales taxes that were collected but not remitted to the state. Most states require participating businesses to comply with the rules beginning no later than December 1, 2017.
This program will only be open August 17 through October 17, 2017. Several states are still finalizing the specific terms of their participation in the program. The states currently participating in the program are Alabama, Arkansas, Colorado, Connecticut, Florida, Idaho, Iowa, Kansas, Kentucky, Louisiana, Nebraska, New Jersey, Oklahoma, South Dakota, Tennessee, Texas, Utah, Vermont, and Wisconsin.
Each situation is unique, so businesses considering this option should consult a tax professional. Cherry Bekaert’s State and Local Tax (“SALT”) team has assisted many of our clients in navigating state voluntary disclosure processes to maximize savings. We are closely monitoring the MTC’s program. If you want to have a conversation about whether your business can benefit from this amnesty program, reach out to Bill Poad, Director, or contact Kathleen Holston, CPA, Senior Manager, for guidance.
The SALT team can also work in conjunction with our Technology Solutions team to help you implement a technology solution to ease the process of collecting, tracking, reporting, and paying sales taxes across multiple jurisdictions – a solution that can integrate with your current systems.